Movie Investing Risks: How Traditional Equity Structures Can Fail Investors
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Randall Lucas' presentation about RevenueLoan to the Angel Capital Association, on Feb 4, 2011.
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Movie Investing Risks: How Traditional Equity Structures Can Fail Investors
- 1. Revenue Based Finance in two acts Angel Capital Association, Seattle 04 February 2011 Randall Lucas Revenue Loan Thursday, February 10, 2011
- 2. Act I: How to rip off Tom Cruise or, Why Movie Investing is a “Risky Business” Thursday, February 10, 2011
- 3. Act I: How to rip off Tom Cruise or, Why Movie Investing is a “Risky Business” Thursday, February 10, 2011
- 4. Act I: How to rip off Tom Cruise or, Why Movie Investing is a “Risky Business” Thursday, February 10, 2011
- 5. Step 0: Find some investors. Thursday, February 10, 2011
- 6. Step 0: Find some investors. • Unsophisticated ones. Thursday, February 10, 2011
- 7. Step 0: Find some investors. • Unsophisticated ones. • (er, not like present company) Thursday, February 10, 2011
- 8. Step 0: Find some investors. • Unsophisticated ones. • (er, not like present company) • (You’re all much too smart...) Thursday, February 10, 2011
- 9. Step 0: Find some investors. • Unsophisticated ones. • (er, not like present company) • (You’re all much too smart...) • (... or you will be after this presentation) Thursday, February 10, 2011
- 10. Step 1: Use a Traditional Equity (or Partnership) Structure Thursday, February 10, 2011
- 11. Step 1: Use a Traditional Equity (or Partnership) Structure • Either way, what you sell the investors is a claim on the residual profits of the enterprise. Thursday, February 10, 2011
- 12. Step 1: Use a Traditional Equity (or Partnership) Structure • Either way, what you sell the investors is a claim on the residual profits of the enterprise. • Let’s say we sell off 70% of the equity for $10 M. Thursday, February 10, 2011
- 13. Step 1: Use a Traditional Equity (or Partnership) Structure • Either way, what you sell the investors is a claim on the residual profits of the enterprise. • Let’s say we sell off 70% of the equity for $10 M. Thursday, February 10, 2011
- 14. Step 1: Use a Traditional Equity (or Partnership) Structure • Either way, what you sell the investors is a claim on the residual profits of the enterprise. • Let’s say we sell off 70% of the equity for $10 M. YOU 30% Investors 70% Thursday, February 10, 2011
- 15. Step 2: Bundle Together Several Projects Thursday, February 10, 2011
- 16. Step 2: Bundle Together Several Projects • You trade more equity for talent contracts (actors, directors, etc.) Thursday, February 10, 2011
- 17. Step 2: Bundle Together Several Projects • You trade more equity for talent contracts (actors, directors, etc.) • You trade another 20% ownership to the talent. But you’ve still got a hefty chunk. Thursday, February 10, 2011
- 18. Step 2: Bundle Together Several Projects • You trade more equity for talent contracts (actors, directors, etc.) • You trade another 20% ownership to the talent. But you’ve still got a hefty chunk. Thursday, February 10, 2011
- 19. Step 2: Bundle Together Several Projects • You trade more equity for talent contracts (actors, directors, etc.) • You trade another 20% ownership to the talent. But you’ve still got a hefty chunk. YOU 20% 10% Investors 70% Thursday, February 10, 2011
- 20. Step 3: Have a Hit Movie Thursday, February 10, 2011
- 21. Step 3: Have a Hit Movie • Implementation is left as an exercise to the reader. Thursday, February 10, 2011
- 22. Mission: Accomplished? Thursday, February 10, 2011
- 23. Mission: Accomplished? • Let’s say you spent the $10 M, grossed $110 M, and should have a profit of $100 M to distribute to the owners. Thursday, February 10, 2011
- 24. Mission: Accomplished? • Let’s say you spent the $10 M, grossed $110 M, and should have a profit of $100 M to distribute to the owners. • ... but in Hollywood, it’s awful fun to be a hit-making producer on a roll. Thursday, February 10, 2011
- 25. Mission: Accomplished? • Let’s say you spent the $10 M, grossed $110 M, and should have a profit of $100 M to distribute to the owners. • ... but in Hollywood, it’s awful fun to be a hit-making producer on a roll. • ... and it’s a lot more fun to spend $100 M than it is to distribute it. Thursday, February 10, 2011
- 26. Mission: Accomplished? • Let’s say you spent the $10 M, grossed $110 M, and should have a profit of $100 M to distribute to the owners. • ... but in Hollywood, it’s awful fun to be a hit-making producer on a roll. • ... and it’s a lot more fun to spend $100 M than it is to distribute it. Thursday, February 10, 2011
- 27. Mission: Accomplished? • Let’s say you spent the $10 M, grossed $110 M, and should have a profit of $100 M to distribute to the owners. • ... but in Hollywood, it’s awful fun to be a hit-making producer on a roll. • ... and it’s a lot more fun to spend $100 M than it is to distribute it. Thursday, February 10, 2011
- 28. • (The fancy word for this is “Agency Risk.”) Thursday, February 10, 2011
- 29. Step 4: “The Producers” Thursday, February 10, 2011
- 30. Step 4: “The Producers” • Tragically, all of the other movies in the “bundle” show a big accounting loss. Thursday, February 10, 2011
- 31. Step 4: “The Producers” • Tragically, all of the other movies in the “bundle” show a big accounting loss. • ...so, there are no profits to distribute. Thursday, February 10, 2011
- 32. Step 4: “The Producers” • Tragically, all of the other movies in the “bundle” show a big accounting loss. • ...so, there are no profits to distribute. • You miss out on your 10% of $100 M, sure... but you got to spend $100 M, which was more fun. Thursday, February 10, 2011
- 33. Step 4: “The Producers” • Tragically, all of the other movies in the “bundle” show a big accounting loss. • ...so, there are no profits to distribute. • You miss out on your 10% of $100 M, sure... but you got to spend $100 M, which was more fun. Thursday, February 10, 2011
- 34. Thursday, February 10, 2011
- 35. • (The fancy word for this is “Accounting Fraud.”) Thursday, February 10, 2011
- 36. • (The fancy word for this is “Accounting Fraud.”) • (But fancy words can be hard to prove.) Thursday, February 10, 2011
- 37. Omar from “The Wire” Thursday, February 10, 2011
- 38. Omar from “The Wire” What about the owners? Thursday, February 10, 2011
- 39. Omar from “The Wire” What about the owners? Thursday, February 10, 2011
- 40. Omar from “The Wire” What about the owners? “Man, money ain’t got no owners ... only spenders.” Thursday, February 10, 2011
- 41. Act II: Surely There’s a Better Way Thursday, February 10, 2011
- 42. Act II: Surely There’s a Better Way • or, RBF to the Rescue Thursday, February 10, 2011
- 43. Act II: Surely There’s a Better Way • or, RBF to the Rescue • and, stop calling me Shirley. Thursday, February 10, 2011
- 44. Act II: Surely There’s a Better Way • or, RBF to the Rescue • and, stop calling me Shirley. Thursday, February 10, 2011
- 45. Retrospective: Characteristics of Movie Financing Thursday, February 10, 2011
- 46. Retrospective: Characteristics of Movie Financing • Too uncertain for fixed payments Thursday, February 10, 2011
- 47. Retrospective: Characteristics of Movie Financing • Too uncertain for fixed payments • Too hard to monitor for equity. Thursday, February 10, 2011
- 48. Retrospective: Characteristics of Movie Financing • Too uncertain for fixed payments • Too hard to monitor for equity. • (How do you think Francis Ford Coppola would act in a board of directors meeting?) Thursday, February 10, 2011
- 49. Retrospective: Characteristics of Movie Financing • Too uncertain for fixed payments • Too hard to monitor for equity. • (How do you think Francis Ford Coppola would act in a board of directors meeting?) Thursday, February 10, 2011
- 50. Retrospective: Characteristics of Movie Financing • Too uncertain for fixed payments • Too hard to monitor for equity. • (How do you think Francis Ford Coppola would act in a board of directors meeting?) • No clearly defined “exit event” Thursday, February 10, 2011
- 51. Retrospective: Characteristics of Movie Financing • Too uncertain for fixed payments • Too hard to monitor for equity. • (How do you think Francis Ford Coppola would act in a board of directors meeting?) • No clearly defined “exit event” • Temptation to spend free cash... Thursday, February 10, 2011
- 52. Retrospective: Characteristics of Movie Financing • Too uncertain for fixed payments • Too hard to monitor for equity. • (How do you think Francis Ford Coppola would act in a board of directors meeting?) • No clearly defined “exit event” • Temptation to spend free cash... • on the wrong sorts of things. Thursday, February 10, 2011
- 53. Retrospective: Characteristics of Movie Financing • Too uncertain for fixed payments • Too hard to monitor for equity. • (How do you think Francis Ford Coppola would act in a board of directors meeting?) • No clearly defined “exit event” • Temptation to spend free cash... • on the wrong sorts of things. Thursday, February 10, 2011
- 54. Retrospective: Characteristics of Movie Financing • Too uncertain for fixed payments • Too hard to monitor for equity. • (How do you think Francis Ford Coppola would act in a board of directors meeting?) • No clearly defined “exit event” • Temptation to spend free cash... • on the wrong sorts of things. Thursday, February 10, 2011
- 55. RBF, a Hybrid Approach Thursday, February 10, 2011
- 56. RBF, a Hybrid Approach Thursday, February 10, 2011
- 57. RBF, a Hybrid Approach • No Exit Required Thursday, February 10, 2011
- 58. RBF, a Hybrid Approach • No Exit Required • Relatively easy to monitor / verify • Cash revenues are more objective Thursday, February 10, 2011
- 59. RBF, a Hybrid Approach • No Exit Required • Relatively easy to monitor / verify • Cash revenues are more objective • Less agency risk (not eliminated) Thursday, February 10, 2011
- 60. RBF, a Hybrid Approach • No Exit Required • Relatively easy to monitor / verify • Cash revenues are more objective • Less agency risk (not eliminated) Thursday, February 10, 2011
- 61. RBF, a Hybrid Approach • No Exit Required • Relatively easy to monitor / verify • Cash revenues are more objective • Less agency risk (not eliminated) • “Pay me X% of topline revenue until Y” • Y may be ROI, time limit, or “forever” Thursday, February 10, 2011
- 62. “What-If:” The Movie Bundle Example Thursday, February 10, 2011
- 63. “What-If:” The Movie Bundle Example Traditional Equity: Gross revenue: $200 M “Real” costs: $100 M --- “Should be” profit: $100 M Misuse of funds: $100 M --- Accounting Profit: $0 Investor ROI: $0 x 70% = $0 Thursday, February 10, 2011
- 64. “What-If:” The Movie Bundle Example Traditional Equity: RBF: Gross revenue: $200 M Gross revenue: $200 M “Real” costs: $100 M RBF Investor ROI: $200 M x --- 10% = $20 M “Should be” profit: $100 M --- Misuse of funds: $100 M Everything else: --- who cares, we got paid. Accounting Profit: $0 Investor ROI: $0 x 70% = $0 Thursday, February 10, 2011
- 65. Dangers of RBF Thursday, February 10, 2011
- 66. Dangers of RBF Thursday, February 10, 2011
- 67. Dangers of RBF • (Usually) a bad idea for fixed assets; debt is cheaper. • Upside is (usually) capped; bad way to invest in the “next Google” • Tax, legal, acctg are somewhat uncertain. • Entrepreneurs unfamiliar; market education risk • Co-investors unfamiliar; risk scaring off syndicate. • Servicing is moderately complex; not just clipping a coupon. • Hint: go with a knowledgeable partner, perhaps? Thursday, February 10, 2011
- 68. RevenueLoan Vital Statistics • Funded $6 M by Voyager Capital, Summit Capital • Goals: Prove model, find market “resonance,” generate returns. • 5 deals closed (3 as RevenueLoan per se) • One “round trip” • Three in repayment, one in grace period • West coast / mountain West (today) • $50-500k investments • Minimum $1 M run rate, 50%+ gross margins. Thursday, February 10, 2011
- 69. Plays Well with Others • Happy to “lever up” an angel equity round • Less dilution for all involved. • Happy to subordinate to hard asset liens • Coexist with purchase money / equipment finance • Happy to “service” larger rounds in syndicate • For deal sizes over $500k total • Happy to talk to YOU about working together. Thursday, February 10, 2011
- 70. Please Stay in Touch • Randall Lucas • rlucas@revenueloan.com • 617-905-7467 • www.revenueloan.com Thursday, February 10, 2011